Fixed Income

Next to international developments, the oil price is a notable factor in the EUR 27 billion market for Nordic high-yield bonds (as well as for the region’s economies). Swings in the price of crude oil again played a significant role in the performance of this segment of the fixed-income market in 2016, holding back returns for much of the year, but also creating bond-picking opportunities for investors.

Due to widespread ‘risk-off’ sentiment among investors, an under-pressure oil price and ahead of the implementation of cost-cutting, refinancing and consolidation plans in the distressed offshore supply segment, credit spreads widened across the board. With new issuance by the previously active offshore supply segment drying up, the field in the primary market was left to the real estate sector, and Swedish issuers in particular.

As the oil price rose – and, in its wake, credit sentiment – performance improved, especially among higher-quality names. Issuance rose, again in particular in the higher-quality segment, including issuers such as Volvo, Color Group, Stolt-Nielsen and GasLog. In the second half of 2016, the energy sector provided the biggest opportunities for excess performance as risk appetite resurfaced and a broad accord on cutting oil output drove crude to its highest level since the summer of 2015.

What can we expect for Nordic high-yield in 2017?

Internationally, the focus is on the economic agenda of US President Trump and its implications for US and, by extention, world growth. For the Nordic region, any spillover effects will be felt in part through the oil price, where we expect levels above USD 55/barrel to brighten the outlook for the highly energy-related Nordic high-yield market. At the same time, we would not rule out attempts by the US to cap the upside of the oil price in favour of US onshore and shale oil production.

We should, however, note that energy-related bonds no longer dominate the Nordic high-yield market. From a share of 60% in 2009, the oil and gas-related segment now accounts for around 20% of the market (see Exhibit 1). The low issuance volume in energy-related bonds over the past couple of years has allowed the market share of other sectors to rise, boosting diversity in the high-yield market.

Exhibit 1: Breakdown of the Nordic high-yield bond market by sector

Source: Nordic Trustee as of October 2016

Exhibit 2: Current outstanding volume of high-yield bonds by country

Source: Nordic Trustee as of October 2016

Best-quality stability and recovery plays

In light of the general credit spread tightening in 2016 and amid expectations of increased fiscal stimulus in the US and rising interest rates around the world, we expect the best-quality names to remain relatively stable in 2017 and yield between 5% and 8% over the year.

Spreads on riskier bonds, rated single B, are expected to tighten as liquidity premiums fall, while the general appetite for yield remains intact. Companies in restructuring mode should offer opportunities since we believe that the bottom in valuations of these issuers has been passed, leaving potential for price appreciation and a positive portfolio contribution.